Why Founders Leave After Acquisitions

Why do founders leave after their companies are acquired?

There are many nuanced answers, but in the short and medium term, it’s incentives.

Acquirers use 3 incentives to get founders to stay:

  • Sticks. If you leave, you lose X% of the consideration. Acquirers try to put 30%-40% of the founders’ consideration at risk, if they can get away with it. This sort of works, but it leads to “rest-and-vest” behavior if not thoughtfully combined with Carrots (next point).
  • Carrots. If you stay, you make Y% More. Often, a lot more in bigger deals. This works well oftentimes, but you can end up in a weird situation where what if the CEO tries hard but doesn’t hit the goals? Or even if the business line is wound down, in smaller acquisitions. Do you not pay out the carrot in those cases? You sort of have to, or disalignment creeps in.
  • Team. If you stay, your team gets Z% More. But if you leave — they don’t. This is more common these days than it used to be, and it can be a very powerful incentive. An acquirer may put a large stay pool for the rest of the team in place for a CEO that makes a lot of money to incent her/him to stay. But if the CEO leaves, part or even all of the Stay Pool is forfeited.

Done wrong, a CEO may exit in weeks. I left after 20 days the first time I went through.

Done right, a CEO might stay 2–3 years without overthinking it.

But after that, the role has to be big enough. Do you really want to work for someone again? Is this really what you want to do? Sometimes. But it’s tough to get this part right.

And beyond all this, one reason founders leave is because they are tired. They sell because they need a break. You see this pretty often in companies acquired that are 4–5 years old or so. But it can happen at any stage. It’s not easy. So pace yourself. As impossible as that sounds. Or even is.

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Published on January 25, 2019

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